Question: Typical valuation metrics like the P/E ratio don't really work for fast-growing companies with no profits. What should I use instead?

Answer: Rapidly growing companies can make for some pretty lucrative investment opportunities. As one example, Tesla's stock is up more than 2,000 percent since its 2010 IPO, despite that the company has yet to produce a full-year profit. However, this lack of profitability can make them difficult to value.

There are several metrics you can use to value stocks without earnings. One method I like to use involves a combination of a company's price-to-sales ratio and its revenue growth rate. (I'll invest in a company with no earnings, but never in a company with no sales.)

Let's look at a pair of examples. One of my favorite high-growth companies that has yet to turn a serious profit is Square. The fin-tech company has a market capitalization of $21.8 billion, and its second-quarter revenue, when annualized, translates to a price-to-sales ratio of 14.2. Square's adjusted revenue grew by 60 percent over the past year.

Next, yet-to-be profitable social media company Snap trades for a price-to-sales ratio of 11.5 based on its annualized second-quarter sales and just reported 44 percent revenue growth. So this is a good example of how one of these variables can offset the other. Square trades for a more "expensive" price-to-sales ratio but also is growing at a faster rate.

There are other valuation metrics that don't involve earnings that you can use as well. Book value per share is a good one, as are the debt-to-equity and the enterprise value-to-EBITDA ratios. And if a company is particularly cash-rich, that should also be taken into consideration. The point is that even if a company doesn't have earnings, there are plenty of metrics you can use to get a pretty thorough picture of its valuation.

Matthew Frankel, CFP® owns shares of SQ. The Motley Fool owns shares of and recommends SQ and TSLA. The Motley Fool has the following options: short September 2018 $80 calls on SQ. The Motley Fool has a disclosure policy.

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